Bullion was hit hard after minutes from the Fed's July meeting on Wednesday showed policymakers debated whether interest rates should be raised earlier given a surprisingly strong job market recovery.
The metal came under particular pressure on Thursday when a break below the 200 day moving average of $1,284 an ounce triggered stops and sent prices tumbling over 1 percent.
"The technical picture for gold is very weak at the moment. We could slide all the way below $1,250, especially if there is more evidence about an earlier rate increase," said a precious metals trader. "The stronger dollar isn't helping either."
Spot gold was little changed at $1,278.11 an ounce by 0330 GMT, near a two-month low of $1,273.06 hit on Thursday, when it fell for a fifth straight session.
The metal is down 2 percent for the week, its biggest drop since the week ended July 18.
The dollar hovered just below its 2014 peak against a basket of major currencies early on Friday, with any further strengthening likely to add pressure to gold.
Thursday data showing U.S. home resales raced to a 10-month high in July and the number of Americans filing new claims for jobless benefits fell last week signalled strength in the economy, dulling gold's appeal as a safe-haven.
Investors fear strong data would prompt the Fed to soon raise interest rates. Higher rates would hurt non-interest bearing assets such as gold.
Markets are eyeing Fed Chair Janet Yellen's speech at the annual gathering of central bankers in Jackson Hole, Wyoming later on Friday.
Geopolitical tensions in Ukraine and the Middle East were also being watched for any escalation in violence that could prompt safe-haven bids for gold.
Physical markets failed to provide any significant support for gold as demand in major consumers China and India remains weak.